[Business forum] FDI takes political platform in local elections

KISC 2000/05

KOREA Herald 2000/04/12

American political economist John Kenneth Galbraith once said that nothing was so admirable in politics as a short memory. In view of the upcoming elections and platforms that have divided the ruling and opposition party - among them, the issue of foreign investment - memories of the financial crisis have evidently faded, replaced by freshly instilled propaganda and visions of a country sold out to foreigners.

Korea First Bank was sold to Newbridge Capital of the U.S. at one-tenth of what it cost the government to salvage the enterprise. Negotiations between the French company Renault and Samsung Motors are hinting at a transaction that will compare similarly in value, prompting cries about an outflow of national wealth. Politicians are appealing to nationalism in hopes of obtaining more votes, failing to share with the public the higher costs involved in sustaining these unprofitable companies.

Who would have guessed that just more than two years ago, Korea was nearly swept under by a financial crisis of an unprecedented scale and appealing to the international community for desperately-needed foreign reserves? The depleted foreign reserves served as a catalyst to the financial crisis of 1997, for which the high debt-to-equity ratios of Korean companies, operational inefficiency and the lack of management and financial transparency are fundamentally attributable. FDI not only serves as a guard against such moral hazards, but also acts as a stabilizer against the risk of financial panic, whereas short-term borrowing carries substantial risks. In particular, foreign invested firms have shown good cash flow and lower debt-to-equity ratios.

According to an analysis by the Bank of Korea, the debt-to-equity ratio of foreign invested firms was about 194 percent, compared to 231 percent of purely domestic firms in 1998. Research by the Korea Development Institute - the Korean government's economic policy think-tank - finds that firms and sectors with high FDI in Korea have higher average labor productivity, pay higher wages, and record higher R&D expenditures. It also finds that value added per capita in foreign-invested firms exceeded in 1998 that by purely domestic firms by 1.4 times. A study by the government of New Zealand also indicated that foreign firms actually reinvested 90 percent of their earnings back into the economy.

But as Korea's second automobile giant threatens to fall into the hands of foreigners, Daewoo's uncertain future has revived the old suspicion that FDI is really a means to dominate Korean industries, and that foreign entities are out to take advantage of some post-crisis bargain sale.

The so-called "fire sale issue" of foreign entities' assuming domestic assets at give-away prices was likewise the focus of much controversy during the rise in Japanese equity In the U.S. in the late 1980s. This was seen as gradual infiltration of the American economy by the Japanese, alarming the American public and setting in motion "Japan bashing." What many Americans did not realize was that Japan's actual share in the economy as a whole was quite low (4 percent), smaller than many other advanced countries.

Likewise, this usurpation perception in Korea is without merit and evidence. In actuality, although cumulative FDI in Korea surged to 7.7 percent in 1999, up from 3.4 percent in 1997, relative to GDP, this is still far below Singapore (81.6 percent), Malaysia (38.1 percent), China (23.5 percent) and the U.K. (21.5 percent).

In addition, based on data given by the UNCTAD's World Investment Report, 1999, the ratio of repatriated earnings to FDI in Korea, as an indicator of the outflow of national wealth, averaged 15.9 percent between 1991 and 1998, which is very low compared to 37.5 percent for other countries and 33.7 percent for Asian-Pacific countries.

UNCTAD also reports that Korea has the lowest transnationality index among developing countries, reflecting a minimal presence of foreign economic activities in the Korean economy as indicated by the lower share of foreign assets, sales and employment in their respective totals.

Of course, no empirical evidence on the benefits of FDI will override political interests. Many interest groups stand to lose against foreign competition in the short-run, and government leaders cannot ignore their demands for protective measures. Whereas interest groups are strong in their stand against certain policies, the general public, the main beneficiaries of an open economy, are not united in pursuing the gains from FDI.

Hence, we should be concerned about how the misplaced energies of this year's elections threaten to offset the benefits we have brought to the economy through our FDI policies and focus on the big picture - that is, making Korea a truly globally competitive and advanced country for international commerce.

by Kim Wan-soon